The Trouble With Warren Buffett's Methods

Unfortunately, small investors often fail to implement Buffett's strategy successfully. For one thing, many of us - Buffett included - learn investing through trial and error. Sure, we read as much as we can before we begin, but reading isn't enough. It's only when you've put your own savings on the line and lost money that you really learn. Making mistakes is how the majority of us learn our most important lessons.

But if you've got to wait five years before a stock you'd like to own becomes available at the right price, then you're going to miss out on a lot of market experience. And what if it turns out you waited five years to make your first mistake? The next five years will give you a lot of time to reflect on that. You'll just have to hope that you will learn enough from your first mistake not to make a second. So, we would reiterate - it takes a lot of practice before a baseball player consistently hits home runs from perfect pitches.

Small investors who want to invest like Warren Buffett fail because they do not have access to the quality of information Buffett has. Compared with most of us, Warren Buffett has enjoyed a privileged position from the very beginnings of his career. He is the son of a United States Congressman - a Congressman who was also a stockbroker.

For most of his life, Warren Buffett has been able to chat with and gather information and advice from CEO's and other big movers that small investors have no access to. Warren began trading in stocks at the tender age of 11 years.

Beginning investors fail because they learn in "How to be a New Warren Buffett" books that they must invest with a ten-year perspective or longer. When their stocks go up, they're happy. When their stocks do down, they're less happy but they tell themselves "I'm a long term investor". When their stocks continue to go down, they get worried. When their stocks go down even further, they eventually give in and sell - at a big loss. They do not have the long-term confidence in their stocks that Buffett - through superior information sources and superior market experience - has in his. Those investors who do have confidence in their stock picks often find their confidence is misplaced. They doggedly hold on to inferior stocks, believing they are following the Buffett way. In reality they aren't and they will not be rewarded because they paid too much in the first place for inferior stocks. Buffett buys his stocks with a skill few of us can match. Far from trying to exercise patience, some small investors, filled with sheer enthusiasm (and a hint of greed) from reading "How to Become A Millionaire Like Warren Buffett" rush out and buy stocks. Unfortunately, most of them pay too much for their stocks or the stocks don't have as good long-term prospects as Warren's own picks.

Beginning investors fail because, in addition to lacking Buffett's superior access to information, they lack his temperament. Buffett says if you cannot watch your portfolio lose 50 percent of its value without becoming panic-stricken, you shouldn't be in the market. Well, according to that criterion, most of us should think very hard before investing in stocks. Although perhaps not panic-stricken, most of us would be deeply perturbed if our portfolio lost half its value. For the majority of us, the money we're putting into stocks is hard earned. To watch it disappear is distressing. The distress can result in small investors selling fundamentally sound stocks just before they recover. Unfortunately, people read books about investing like Buffett and convince themselves that they will be able to handle the stress of watching their stocks dropping in value. It's only when it really happens to them that they learn the truth - watching your stocks sink is extremely stressful and, after holding underperforming stocks for a long time, people sometimes do end up selling at a big loss.

Small investors fail because they do not have Warren Buffett's genes. Buffett is an unparalleled genius who has thought deeply about investment for decades. Although he talks modestly and in homely tones to the public, he is an extremely clever and competitive man with an enormous capacity to memorize numbers and facts and apply them in financial calculations and in due diligence. He has developed an immense array of strategies and tactics to keep his wealth increasing, irrespective of market conditions. You should no more think you might emulate Warren Buffett after reading a few books than you should believe that by studying physics for a few months in your spare time, you might emulate Albert Einstein or Isaac Newton.

Warren Buffett's methods are appropriate for experienced investors who share his temperament. New investors may enjoy greater success using less challenging methods.

Source: Tezimandee forum

Posted by toughiee on
Wednesday, January 03, 2007 at 10:22 AM |Permalink

with a P/E of 25+, i think the Indian Stock market is priced for perfection. Perhaps it may not be too long before we differentiate the real value investors to the faux warren buffetts.

I think the article is inaccurate on several counts. Buffett has said before that to be successful, controlling one's emotions is more important than IQ.

While Buffett may have had access to insiders and CEOs, I doubt if he actively used it as an informational advantage. His pride wouldn't allow it, and he would not have risked his reputation on it.

Lastly if one were to read the buffett speeches & letters to shareholders instead of reading "Buffett-How Tos", the letters actually spell out how Buffett would invest in markets good and bad.

By the way, I doubt you need 5 years to find an attactive stock. You just need to define the circle of competence of which companies you'd like to own and then wait for a basket of stocks to become attactive. In the mean time, there are alot of special situation to engage in or as buffett would call "work-outs".

I agree with the artice as most of the readers have this common attitude.But its not entirely true that small investors cannot practice his methodology.After all even Mr.Buffet was once a small investor to start.

People who wish to follow his methodologies, better read his shareholders letters from 1970 till date and Partners Letters from 1959-1969.Sure there is lessons and ideas learnt from that.

Lastly, i appericaiate for this artice where the author has taken a different perspective which is very much needed for better understandings on investments.

i thought ur comments valid in most aspects. my favorite example was the newton-einstein analogy; quite droll with much truth. for beginners i would suggest reading WEB'Sletters at berk's web site, also 2 books r useful: 1)"one up on wall street" by lynch. 2)"the new buffettology" by mary buffett. most important,imho, is introspection: if u can FEEL u have investing talent than u probably do. BUT u must be honest w/urself. if u really can't feel a talent then, following graham: buy index funds. best of luck.